And another thing that’s not in the Budget…

This article originally appeared in BusinessGreen on 13th March 2017.

I suppose it is the prerogative of the Opposition to bang on about what is not in the Budget as a response to what actually is: “If only the government had put X, Y, Z in the Budget/put this tax down/helped this group of people, all would be fine, but they didn’t.” Writing this on Budget day does tempt me in that direction, but I will resist it… almost. What I want to bend your ear about is something that was not in the Budget, but should have been, because, well, the government said it would be.

The Levy Control Framework (LCF) -the arrangement that funds and caps underwriting for renewable energy development – comes to an end in 2020. No extension of the framework has been in sight for some time now, which is potentially very destabilising for renewables investment since it is now 2017, and it takes rather more than two and a half years to get a renewables project up, running and generating. Not knowing whether there is going to be any support in place when your project seeks backers – who, not unreasonably, will want to know how it is going to be funded and supported – tends to kill off those developments. Rather important, then, that we know what the next stage of the LCF will look like both in terms of what will be funded and to what extent.

The government seemed to recognise this at the time of the last Autumn Statement. Whilst they couldn’t tell us at the time of the statement what the control total for 2025 was going to be, we would be told soon. “The government is considering the future of the Levy Control Framework…” the Treasury red book told us (except rather confusingly it happened to be a green book on that occasion) “…which it will set out at Budget 2017”.

About time, too many people thought, especially since the LCF was running into some serious deep waters.

Shortly after the Autumn Statement, the National Audit Office reported on the overspend that had gathered in the early stages of the 2015-2020 phase of the LCF. The control total of spending (on Renewable Obligation Certificates and latterly Contracts for Difference) was supposed to be £7.6bn by 2020, but turned out to be a projected £9.1bn – £1.5bn over the cap. Since the rules of the Levy Control Framework require any overspend to be clawed back very quickly from future years, there arises an immediate conundrum for the future of the framework: will any new control total announcement include the fact that £1.5bn needs to be clawed back from new spend, since all (or most) of the £9.1bn will have to go on continuing payments for 15-year ROC and CfD contracts.

The overspend has been attributed to some rather predictable variances: offshore wind has proved to be rather more efficient than envisaged, meaning that it will collect more payments from more output. And energy prices have been going down and not up, meaning that the difference between the ‘strike price’ (the overall total sum the operator gets) and the ‘reference price’ (the money the developer would get from selling the output) is widening, meaning more money from the LCF for existing schemes and less available for new entrants.

A rather badly designed scheme is going into its next phase more or less bankrupt, and unable to take on new commitments. Except that… the government has effectively borrowed some £700m for new entrants from the next phase of the (as yet unannounced) scheme by holding auctions for new offshore wind over 2018-19 which will pay out in CfDs in the early 2020s when the winning schemes are up and running.

So, regrettably – but perhaps unsurprisingly – in view of the almighty mess that is the LCF at this moment in time, the government has not actually included a new programme and control total in the Budget. Instead, the red book (and it really is red this time) says: “the government recognises the need to limit costs to businesses and households as the UK decarbonises its energy supplies. The existing Levy Control Framework has helped to control the costs of carbon subsidies in recent years, and will be replaced by a new set of controls. These will be set out later in the year.” Which rather suggests that the government looked over the cliff at the LCF, decided that it was too horrible to contemplate, agreed that something else should replace it, hasn’t figured out yet just what, but BEIS and Treasury officials are hard at work with hot towels round their heads thinking about what it should be. They have now given themselves until “later in the year” to find something.

And that’s the end of the Levy Control Framework for now. But all is not yet lost. As we have been reminded by the Chancellor, there will be TWO Budgets this year, as the Budget day reverts to the autumn. So perhaps the prediction in the Autumn Statement will turn out to be true: there will be an announcement in “Budget 2017”, only not in the Budget we all thought the statement meant. So all they’ve got to do is figure out a new scheme, hide the overspend, work out how new entrants can get paid, honour the money committed in advance to the next round of offshore wind projects, and all will be well. Just you wait until the next Budget. It’s bound to be in there.

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One thought on “And another thing that’s not in the Budget…

  1. This is a good post, investing in renewable energy is so important right now and hopefully will become a priority in the future.The long term benefits are widely known but that doesn’t make them any less important. As well as putting money into big renewable projects, it’s good to see funding which encourages the use of renewable energy on smaller scales, like the funds given for solar panels etc. which encourages eco-friendly energy use in even the smallest of uses.

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